CEO Compensation

More than half the compensation awarded to 51 CEOs last year was tied to their companies' financial or stock-market performance, according to a review of proxy statements by the Hay Group and The Wall Street Journal. Photo: AP Images.

More than half of the compensation awarded to 51 CEOs last year was tied to their companies' financial or stock-market performance, according to a preliminary review of proxy statements by consulting firm Hay Group and The Wall Street Journal. In most cases, the companies must hit specified targets for the CEO to receive the promised money or equity.

By comparison, three years earlier, in 2009, 35% of the compensation for CEOs at the same companies carried performance conditions, Hay says. The rest of their pay came from salaries and grants of stock and stock options with no performance hurdles.

The shift in how CEOs are paid highlights the growing role of investors in shaping executive compensation—and their push to align pay more closely with corporate results.

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Since 2011, big companies have had to offer shareholders a periodic non-binding vote on executive compensation. Fewer than 5% of companies fail to win majority support, but the fear of a poor showing has prodded companies to alter executive-pay plans, consultants and executives say.

"Investors have more influence over pay than ever," adds David Wise, a vice president at Hay, which analyzes proxy statements for the Journal. "In this environment, the only way companies are increasing pay is by clearly tying it to performance."

The 50 companies included in the survey all had annual revenue exceeding $6.7 billion and filed proxy statements after May 1, 2012. One company has two CEOs. The Journal will report the full survey of 300 companies in May.

At the 40 companies in the preliminary survey where the CEO has been in place at least two years, compensation more closely mirrored corporate results last year.

Median total direct compensation rose 6.9%, to $9 million, close to the median 7.6% shareholder return posted by the companies. Total direct compensation includes salary, all bonuses, and the value of equity at the time it was granted. Shareholder return includes share-price changes and the value of dividends.

As was true in 2011, bonuses generally tracked the companies' annual financial results. Median net income at the 40 companies fell 3.9%, and the annual bonuses of their CEOs fell 7.6%.

ENLARGE

Consider Air Products & Chemicals Inc.APD0.12% Earnings per share at the Allentown, Pa., maker of industrial gases fell far short of the company's target of 9% growth, excluding certain costs, in the fiscal year ended Sept. 30, 2012. CEO John McGlade paid the price, with a 65% cut in his annual bonus, to $898,000, from $2.5 million the prior year. Mr. McGlade's grants of stock and stock options shrank as well, reducing his total direct compensation 19%, to $9.1 million.

In a statement, Air Products said "economic trends and slow manufacturing growth" hurt its results and Mr. McGlade's pay. "Our executive compensation is linked to performance against metrics that drive shareholder value, specifically earnings growth, return on capital and stock performance," the company said.

At Smithfield Foods Inc., net income fell 31% in the fiscal year ended April 29, 2012, and shareholders suffered an 11% loss. Directors also changed CEO C. Larry Pope's bonus formula, making it less lucrative. As a result, Mr. Pope's cash bonus fell 64%, to $4.7 million, contributing to a 31% drop in his total direct compensation, to $12.9 million.

Like many companies, Smithfield is also making other changes in its executive-pay plan. The Smithfield, Va., pork producer, which is under pressure from a big shareholder that wants to split the company, won't grant Mr. Pope stock options this year and will tie some of his stock awards to how Smithfield stock fares compared with rivals.

A Smithfield spokeswoman referred to the company's proxy statement, which says Mr. Pope's compensation "moves up and down in proportion to the company's profitability."

The trend toward performance-based pay has been building for a decade and extends beyond the 50 companies in the Journal/Hay Group survey. Pay consultant Farient Advisors says that 64% of the companies in Standard & Poor's 1500-stock indexes attached performance criteria to equity grants in 2011, up from 20% in 2002.

"Companies in the past few years have spent a lot of time trying to align performance and pay," says Rose Marie Orens, senior partner at Compensation Advisory Partners LLC, a New York pay consultant.

The Journal's preliminary survey measures the value of compensation when it's granted. It still isn't certain that the increased use of performance hurdles will reduce actual payouts to executives. At some companies, though, there are hints of smaller paydays.

But Mr. Splinter won't receive the shares unless Applied outpaces peers' operating-profit margins and shareholder returns through 2015. Applied missed the target last year, so Mr. Splinter hasn't received any shares. He has three more tries. If he does get some, he'll have to wait up to three additional years to sell the shares.

Aecom Technology Corp.ACM0.16%, a Los Angeles engineering-consulting firm, took this concept one step further. CEO John Dionisio agreed to add an earnings target to the $2.4 million in stock and options he was granted in 2011. Aecom posted a loss in the fiscal year ended Sept. 30, 2012, so it missed the target, and Mr. Dionisio forfeited the earlier grants.

Directors also cut Mr. Dionisio's annual bonus roughly in half, to $1.5 million, and trimmed the value of his equity grants by 4%. In all, Mr. Dionisio's compensation fell 17%, to $8.1 million.

In its proxy statement, Aecom said the earnings targets were added "to strengthen the pay-for-performance linkage." In a news release, the company said, "Our executive-compensation programs are designed to support our long-term success and embrace the pay-for-performance philosophy."

There are exceptions to the trend, including the highest-paid CEO in the preliminary survey, Oracle Corp.'sORCL0.73%Larry Ellison. Mr. Ellison received compensation valued at $94.6 million in the fiscal year ended May 31, 2012, the vast majority through seven million stock options valued at $90 million.

The options carry no performance targets. But in its proxy statement, Oracle says the options align Mr. Ellison's pay with company performance because they will have value only if Oracle's stock rises. "When our stockholders are rewarded, our executive officers are also rewarded," the company says.

With more pay linked to performance targets, some investors are turning their attention to the rigor of the targets, says Robin Ferracone, chief executive of Farient, the pay consultant. "The next frontier is not only honing the measurement system but also the goal setting," she says.

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